Investors demand greater liquidity from hedge funds

By: Chris Panteli | 14 Sep 2011

Three-quarters of institutional investors are looking for greater liquidity in their hedge fund investments following the financial crisis, research by Preqin shows.

A survey by the alternative asset analyst found funds with lock-up periods are now considered less favourable amongst investors as they seek the flexibility to exit their investments at their own discretion.

Although some investors are prepared to compromise on their liquidity demands when offered more favourable terms in other areas, 34% view liquidity as their priority.

The survey also found:

• 30% of investors will not consider investing in funds with a lock-up period.

• Only 6% will invest in a vehicle with a lock-up period of over 24 months.

• 46% of investors preferred quarterly redemptions, while 32% seek access to funds with monthly redemptions.• 42% would be willing to accept longer lock-ups in return for lower management fees, while 38% felt the same about performance fees.

• 12% will only consider investing in liquid strategies at this time.

• 54% of investors have invested in a fund which gated assets. The same proportion of investors would consider a fund with gating clauses in the future, suggesting for many investors the gates of the past have not deterred their appetite in the future.

It seems the industry is well aware of liquidity concerns from investors. The research found 30% of hedge fund managers have shortened redemption periods since 2008 and 44% of hedge fund managers rate liquidity as something they pay a high level of attention to. More than half (53%) of funds said they do not lock-up institutional capital.

Preqin hedge fund data manager Amy Bensted said: “The majority of investors have increased their liquidity requirements following the market downturn and the demand for funds with shorter lock-up periods and greater flexibility in terms of redemptions has grown in the years since 2008.

“Those funds that have adopted better liquidity terms for their investors have been more successful in gaining institutional capital, while demand for increased liquidity is also driving the growth of specialist structures such as managed accounts and UCITS.

“Investors are demonstrating flexibility, with a significant number willing to compromise their liquidity demands in return for more favourable fund terms elsewhere. Ultimately, however, managers that understand the needs of investors and adapt their products accordingly will be the most successful in attracting institutional capital.”